Lean Supply Chain Management

Introduction

Lean supply chain management is not exclusively for those companies who manufacture products, but by
businesses who want to streamline their processes by eliminating waste and non-value added activities.
Companies have a number of areas in their supply chain where waste can be identified as time, costs or
inventory. To create a leaner supply chain companies must examine each area of the supply chain.

Procurement

Many businesses have complex purchasing operations. Large companies often have corporate purchasing
groups as well as local purchasing. This can lead to vendors being given multiple contracts leading to
variations in prices depending on location. Companies that practice lean supply chain management reduce
their procurement function so that each vendor has one point of contact, one contract and offers one price for
all locations. Businesses are looking to new technologies to assist them in improving procurement processes.
These include internet based purchasing that allows requisitioners to purchase items from vendor’s catalogs
containing company wide contract prices. Changes in payment options to vendors can also streamline
processes. Companies that use a two-way match, which is payment on receipt rather than payment on invoice,
will reduce resources in their purchasing department as well as improve supplier relationships.

Manufacturing

Lean supply chain management gained popularity in the manufacturing area as this is where significant
improvement can be achieved. Manufacturing processes can be improved to reduce waste and resources while
maintaining operational performance. Companies who have adopted lean supply chain practices have
examined each of their routings, bill of materials and equipment to identify where improvements can be
achieved.

Warehousing

Warehouse processes should be examined to find areas of eliminating waste of resources and non-value added
steps. One area the companies should always be working on is the reduction of unnecessary inventory. The
accumulation of inventory requires resources to store and maintain it. By reducing unnecessary inventory, a
company can minimize warehousing space and handling, in turn reducing overall costs.

Transportation

Businesses who want to implement lean processes often look to their transportation procedures to see where
they can be streamlined. In many instances companies find that their efforts to improve customer satisfaction
leads to poor shipping decisions. Orders are shipped without combining additional orders to minimize costs or
expensive shipping options are selected because of a customer request. Businesses often find that they are
using a number of shippers unnecessarily when they could be reducing their shipping options and reduce
overall costs.

Conclusion

Lean supply chain management requires businesses to examine every process in their supply chain and
identify areas that are using unnecessary resources, which can be measured in dollars, time or raw materials.
This will improve the company’s competitiveness as well as improve the company’s overall profitability.
Introduction to Chain Management Supply
Introduction to Supply Chain Management

If your company makes a product from parts purchased from suppliers, and those products are sold to
customers, then you have a supply chain. Some supply chains are simple, while others are rather complicated.
The complexity of the supply chain will vary with the size of the business and the intricacy and numbers of
items that are manufactured.

Elements of the Supply Chain

A simple supply chain is made up of several elements that are linked by the movement of products along it.
The supply chain starts and ends with the customer.

• Customer: The customer starts the chain of events when they decide to purchase a product that has
been offered for sale by a company. The customer contacts the sales department of the company, which
enters the sales order for a specific quantity to be delivered on a specific date. If the product has to be
manufactured, the sales order will include a requirement that needs to be fulfilled by the production
facility.
• Planning: The requirement triggered by the customer’s sales order will be combined with other orders.
The planning department will create a production plan to produce the products to fulfill the customer’s
orders. To manufacture the products the company will then have to purchase the raw materials needed.
• Purchasing: The purchasing department receives a list of raw materials and services required by the
production department to complete the customer’s orders. The purchasing department sends purchase
orders to selected suppliers to deliver the necessary raw materials to the manufacturing site on the
required date.
• Inventory: The raw materials are received from the suppliers, checked for quality and accuracy and
moved into the warehouse. The supplier will then send an invoice to the company for the items they
delivered. The raw materials are stored until they are required by the production department.
• Production: Based on a production plan, the raw materials are moved inventory to the production area.
The finished products ordered by the customer are manufactured using the raw materials purchased
from suppliers. After the items have been completed and tested, they are stored back in the warehouse
prior to delivery to the customer.
• Transportation: When the finished product arrives in the warehouse, the shipping department
determines the most efficient method to ship the products so that they are delivered on or before the
date specified by the customer. When the goods are received by the customer, the company will send
an invoice for the delivered products.

Supply Chain Management

To ensure that the supply chain is operating as efficient as possible and generating the highest level of
customer satisfaction at the lowest cost, companies have adopted Supply Chain Management processes and
associated technology. Supply Chain Management has three levels of activities that different parts of the
company will focus on: strategic; tactical; and operational.

• Strategic: At this level, company management will be looking to high level strategic decisions
concerning the whole organization, such as the size and location of manufacturing sites, partnerships
with suppliers, products to be manufactured and sales markets.
• Tactical: Tactical decisions focus on adopting measures that will produce cost benefits such as using
industry best practices, developing a purchasing strategy with favored suppliers, working with logistics
 companies to develop cost effect transportation and developing warehouse strategies to reduce the cost
of storing inventory.
• Operational: Decisions at this level are made each day in businesses that affect how the products
move along the supply chain. Operational decisions involve making schedule changes to production,
purchasing agreements with suppliers, taking orders from customers and moving products in the
warehouse.

Supply Chain Management Technology

If a company expects to achieve benefits from their supply chain management process, they will require some
level of investment in technology. The backbone for many large companies has been the vastly expensive
Enterprise Resource Planning (ERP) suites, such as SAP and Oracle.
Since the wide adoption of Internet technologies, all businesses can take advantage of Web-based software and
Internet communications. Instant communication between vendors and customers allows for timely updates of
information, which is key in management of the supply chain.

Creating a Logistics Strategy

What Is a Logistics Strategy?

When a company creates a logistics strategy it is defining the service levels at which its logistics organization
is at its most cost effective. Because supply chains are constantly changing and evolving, a company may
develop a number of logistics strategies for specific product lines, specific countries or specific customers.

Why Implement a Logistics Strategy?

The supply chain constantly changes and that will affect any logistics organization. To adapt to the flexibility
of the supply chain, companies should develop and implement a formal logistics strategy. This will allow a
company to identify the impact of imminent changes and make organizational or functional changes to ensure
service levels are not reduced.

What Is Involved in Developing a Logistic Strategy?

A company can start to develop a logistics strategy by looking at four distinct levels of their logistics
organization.

• Strategic: By examining the company’s objectives and strategic supply chain decisions, the logistics
strategy should review how the logistics organization contributes to those high-level objectives.
• Structural: The logistics strategy should examine the structural issues of the logistics organization,
such as the optimum number of warehouses and distribution centers or what products should be
produced at a specific manufacturing plant.
• Functional: Any strategy should review how each separate function in the logistics organization is to
achieve functional excellence.
• Implementation: The key to developing a successful logistics strategy is how it is to be implemented
across the organization. The plan for implementation will include development or configuration of an
information system, introduction of new policies and procedures and the development of a change
management plan.

Components to Examine when Developing a Logistics Strategy

When examining the four levels of logistics organization, all components of the operation should be examined
to ascertain whether any potential cost benefits can be achieved. There are different component areas for each
company but the list should at least include the following:

• Transportation: Does the current transportation strategies help service levels?

• Outsourcing: What outsourcing is used in the logistics function? Would a partnership with a third
party logistics company improve service levels?
• Logistics Systems: Do the current logistics systems provide the level of data that is required to
successfully implement a logistics strategy or are new systems required?
• Competitors: Review what the competitors offer. Can changes to the company’s customer service
improve service levels?
• Information: Is the information that drives the logistics organization real-time and accurate? If the
data is inaccurate then the decisions that are made will be in error.
• Strategy Review: Are the objectives of the logistics organization in line with company objectives and
strategies.

A successfully implemented logistics strategy is important for companies who are dedicated to keeping service
levels at the highest levels possible despite changes that occur in the supply chain.

Introduction to the Green Supply Chain

Listening to Environmentally Aware Consumers

As the public becomes more aware of environmental issues and global warming, consumers will be asking
more questions about the products they are purchasing. Companies will have to expect questions about how
green their manufacturing processes and supply chain are, their carbon footprint and how they recycle.

Profiting from Being Green

However some companies have seen that this not a bad thing and indeed have been able to convert the public’s
interest in all things green into increased profits. A number of companies have shown that there is a proof of
the link between improved environmental performance and financial gains. Companies have looked to their
supply chain and seen areas where improvements in the way they operate can produce profits.
General Motors reduced disposal costs by $12 million by establishing a reusable container program with their
suppliers. Perhaps General Motors may have been less interested in green issues if they were making record
profits, but in an attempt to reduce costs in their supply chain, GM found that the cost reductions they
identified complemented the company’s commitment to the environment.

Unaware of Potential Benefits

Companies can find cost savings by reducing the environmental impact of their business processes. By re-
evaluating the company's supply chain, from purchasing, planning, and managing the use of materials to
shipping and distributing final products, savings are often identified as a benefit of implementing green
policies.
Despite the public’s focus on the environment, benefits attributed to reducing a company’s environmental
impact are not in the forefront of supply chain executive’s minds. It appears that many executives are still
unaware that improved environmental performance means lower waste-disposal and training costs, fewer
environmental-permitting fees, and, often, reduced materials costs. Hopefully the interest in green issues and
environmental concern by the public will not wane as economic issues become more important due to the
faltering economy.
Implementing a Green Supply Chain
Environmental issues are at in the public eye and businesses are having to develop supply chain management
strategies that are good for the environment. The articles listed here examine some of the topics associated
with creating a green supply chain.
1. Using Recycled Packaging In Your Supply Chain
Packaging materials are used every day in almost every company that manufactures and sells products. Packaging
is used to move raw material to a manufacturer, bulk finished material to a distributor and then the final product
to the consumer. Packaging material is there to perform a number of tasks; protect the material from damage,
from the environmental conditions, to make transportation easier and to make the item attractive to the consumer.
However, as the public’s perception about the environment changes, companies are looking at how they can adopt
greener packaging alternatives.

Recycled Content

Recycled content is available in packaging materials, including corrugated cartons, paperboard, molded pulp,
newsprint aluminum, steel, glass and some, but not all, plastics. For some packaging materials, it is standard
practice to include some level of recycled content.,

Post-Consumer And Pre-Consumer Content

The term “post-consumer” refers to end products that have been used by the consumer and then separated from
wastes for recycling. Post-consumer materials include materials recycled by both households and non-residential
users such as offices, manufacturers and retailers. Examples of post-consumer materials include block foam, glass
and aluminum containers, newspapers, and corrugated cartons.

Pre-consumer content is different from post-consumer content as it includes waste left over from converting and
printing processes, discarded by the manufacturer prior to use by the consumer. Manufacturers report either total
recycled content by combining the totals for pre and post-consumer or report post-consumer content only. Both
pre-consumer and post-consumer recycled materials provide the environmental benefits. Using post-consumer
content provides markets for items separated for recycling by consumers.

Paperboard Packaging

Due to the low cost, versatility and durability, paperboard is used to package materials in a variety of industries.
Businesses are using increasing amounts of paperboard with post-consumer recycled content because of its high
quality, cost advantage and lower environmental impact.

With the improvements in the quality, variety and availability of recycled content paperboard, companies have
adopted the use of recycled paperboard in products reaching the consumer. Studies have found that over 50% of
products on supermarket shelves are packaged in recycled paperboard.

Consumers are increasing aware of environmental issues and efforts that manufacturers are making with regards
to using recycled packaging does not go unnoticed. In a survey by the Recycled Paperboard Alliance, 61% of
consumers were more inclined to purchase products from a company that uses recycled paperboard packaging.
The study also found that 77% of consumers felt better about a company that uses recycled paperboard and 80%
felt they were "doing something good for the environment" when they bought products with recycled paperboard
packaging.

As companies adopt more environmentally friendly policies, a simple change that can be made in the supply
chain that is should not increase overall cost, is to increase the use of recycled packaging. The products that are
now available, such as recycled paperboard, are of high quality, lower cost and are an important consideration to
consumers
2.Reducing Waste in the Supply Chain

Introduction

Businesses are examining every area of their supply chain to reduce costs. Reducing waste has become a key
component of any cost reduction program that is implemented. There are a number of processes that can be
used in order to reduce waste in a company’s supply chain.

Product Design

Many companies are examining the design of their products to identify where the use of raw materials can be
reduced or expensive materials be replaced. Indeed many businesses are reviewing each component to identify
whether it can be manufactured or purchased more cheaply. When designing product packaging options,
companies are examining cheaper and less wasteful materials.

Resource Management

Each production process should be examined to minimize the waste of raw materials. In manufacturing
operations processes that waste material that cannot be recycled or reused must be redesigned. Even in
processes that do produce waste that can be recycled should be examined due to the costs in recycling
processes.

Use of Scrap Material

As well as minimizing the waste of raw materials in manufacturing processes, the use reuse of waste material
can be expanded. Improvements in the technology of reclaiming waste material has meant that companies that
previously discarded waste products now have the ability to reuse that material. As the recycling technology
becomes more available the costs will inevitably fall helping more businesses with waste issues.

Improving Quality

Quality control is built into all manufacturing processes but is usually focused on the finished product rather
than minimizing waste. Quality management should include the goal of minimizing the waste of raw materials
as well as producing a quality product. Improving the overall quality of a company’s manufacturing process
will reduce waste overall as it will increase the quantity of finished goods that pass quality inspection.

Conclusion

When companies are considering waste minimization programs, they will find that some costs will be required
in the implementation. However as those programs come online, the reduction in waste will produce cost
savings greater than the initial investment. The implementation of waste minimization programs has been
successful in improving company’s products as well as reducing overall costs.

3.Making Your Warehouse Green

Warehouses are busy places. Goods are constantly on the move; inbound and outbound deliveries have to be
dealt with as well as the movements of items from location to location. Many businesses now incorporate
packing and assembly operations within the warehouse, creating an even more complex environment.
Businesses are trying to maximize their return on each dollar spent on warehouse operations. As well as
incorporating value added processes in the warehouse companies are looking to use environmentally focused
procedures to reduce costs whilst increasing their social responsibility efforts.

When businesses look at making their warehouse processes more environmentally focused, they generally look
at three main areas; reduce, reuse and recycle.

Reduce

When we look at a warehouse there are many areas where businesses can reduce consumption, whether this is
consumption of energy or resources. In turn both of these concepts can help reduce spending. As energy costs
continue to rise, any reduction in consumption will help the environment and a company’s bottom line.
Many businesses have been working to reduce the amount of packaging they use in shipping products.
Advances in packaging materials allow a reduction in weight whilst maintaining efficiency. The reduction in
packaging weight not only reduces shipping costs, but saves energy in moving packing material and packed
items around the warehouse. Bio-degradable packaging materials are also an important part of this scenario, so
customers are not liable for disposing of environmentally harmful packaging.
In the warehouse, businesses are reducing energy costs in a number of simple ways such as using motion
sensors to only illuminate areas in use and charging forklift trucks in off-peak hours when energy costs are
lower. Some companies are looking at introducing solar panels on the warehouse roof and intelligent electrical
systems to take advantage of off-peak power.

Reuse

Warehouses have been one area in a business that traditionally reuses materials. Items such as wood pallets
and plastic totes are constantly reused in the warehouse. Some businesses are examining their warehouse
processes to identify where reuse is appropriate.
One area that is of interest is in the adoption of returnable packaging for products. Some packaging can be
extremely expensive to manufacturer and is lost each time a product is sold. By increasing the life of the
packaging and making it easy for customers to return, the packaging can be reused a number of times,
reducing waste and saving money.
Other companies are trying to reuse the packaging material that they receive from their suppliers. Some
packaging cardboard or packing can be reused and can reduce the amount of packing material that needs to be
purchased.

Recycle

Recycling of materials in the warehouse can significantly reduce waste. Sending used packaging and packing
material to recycling facilities rather than waste facilities is the environmentally correct decision to make.
However there are many instances in a warehouse where recycling is also appropriate such as the recycling or
environmentally correct disposal of batteries, oil and chemicals. Many businesses have performed audits of
their locations to identify areas and processes where they can be more environmentally focused. These
processes can significantly reduce costs as well as producing a more environmentally sound company.
However, despite the investment a company makes in order to improve its social responsibility, the employees
need to change their work habits and follow new procedures that combined will help the environment and in
turn help the company’s bottom line.
4.Green Supply Chain Best Practices

Introduction

The trend towards developing a green supply chain is now gaining popularity but most companies are still
coming to terms with how this can be achieved and where do they start. For years businesses have been
concentrating on improving supply chain visibility, refining efficiency and minimizing cost. Despite the focus
being moving towards a green supply chain the goals of visibility, efficiency and cost reduction do not have to
be discarded. By examining the companies who have already made strives towards to a green supply chain, we
can begin to see some best practices that will help others to begin their own transition.

Align Your Green Supply Chain Goals with Business Goals

Creating a green supply chain that has little to do with your business will not help your company to achieve its
business objectives. For example, if a company decides to use biodegradable packaging for its products that
costs 25% more than traditional packaging, this goes against the businesses goals of reducing costs. If a
business has an overall goal to reduce costs then the move to a green supply chain should dovetail with the
business goal. A company should look at its overall business goals and identify how a transition to a green
supply chain can help achieve those goals. For example if a business wants to reduce its energy costs it should
start by looking at the consumption to see if a reduction can be made by using more energy efficient and
greener equipment.

Use Green Supply Chain to Improve Processes

Companies do not often change their businesses processes and it is this attitude allows inefficient processes to
continue unabated causing unnecessary waste and pollution. For example ineffective processes in the US
automotive industry allowed the innovative Japanese automakers to become market leaders. Businesses that
want to transition to a green supply chain should take the opportunity to review all their business processes to
identify areas where adopting a greener outlook can actually improve their business. Companies should review
each process along the supply chain to identify if a more environmentally sound approach will help cure the
inefficiencies that occur. Many companies that have been through this exercise have identified processes where
raw materials were wasted; resources underutilized and unnecessary energy used due to inefficient equipment.

Green Suppliers and Material Refurbishment

Companies reviewing their business processes should look beyond their factory walls. When reviewing
purchasing processes the aim of any company, looking to transition to a green supply chain, should be to find
suppliers who have minimized their environmental impact without reducing the quality of their product or
significantly raising costs. By purchasing products from green suppliers businesses can then begin their green
supply chain before any material reaches their site.
At the opposite end of the supply chain businesses should look at their return process. Many businesses have
not developed a successful refurbishment program for their products that have been returned or exchanged. By
offering refurbished items businesses can increase purchasing options to their customers and widen their
customer base, whilst improving the environmental impact of their products.
There are many ways in which businesses can transition to a green supply chain; however it is important to
realize that it is difficult to achieve results without strong focused leadership. Senior management has to lead
the effort to move to a green supply chain and provide the resources for the transition. Many businesses have
documented a intent or plan to implement a green supply chain, but without the necessary resources, both
financial and manpower, any impact will be minimal.
5.Where to Recycle Computers in Canada

Electronics seem to age ever more rapidly. Replace any one piece of computer equipment and you immediately
need to replace three more. For years I just piled all my old computer gear in the garage as I didn’t want it to
end up in a landfill. But now we all have a lot more computer recycling choices.

Want to recycle your computer but don't know where or how? This list of ideas and places for recycling your
computer equipment in Canada will help.

1. Check with the manufacturer of your computer or electronic device to see what recycling programs
the company offers.

Some have none still but most major electronics manufacturers are offering some sort of recycling options. In
some cases, you'll only be able to participate if you paid an environmental fee when you bought your computer
but others offer computer recycling and recycling of other electronics for a fee. Some is even free, such as Dell
Canada's free home system recycling program.

Another computer recycling program of special note is Lenovo Canada's PC Recycling Service for individuals
and small-business customers, which allows customers to recycle any manufacturer's PC (including system
units, monitors, printers and peripherals) for $49.95 (Canadian dollars), including shipping.

Dell, Apple, Hewlett-Packard (Canada) Co., IBM Canada Ltd. and Lexmark Canada Inc. are among the
founding members of Electronics Product Stewardship Canada (EPS Canada), a non-profit organization that is
developing a national electronics end-of-life program in Canada. This program is based on establishing
environmental handling fees across the country for each major electronics product line.

2. Find out what provincial and/or municipal electronics recycling programs are available in your area.

Alberta was the first province to provide electronic recycling to its residents. The Alberta Recycling
Management Authority was established in 2004 and today there are more than 180 collection sites across the
province where people can drop off their computers, computer equipment, printers and televisions. The
program is funded by environmental fees collected on electronics at the time of purchase.

Saskatchewan has followed suit; the SWEEP program, started in February 2007, also provides collection sites
across the province where residents can drop their desktop computers, laptops, printers and televisions off for
recycling.

Strategic Supply Chain Management

Strategic supply chain management decisions are made at an enterprise level that determine benefits and
efficiencies of the supply chain. These articles and links examine these strategic decisions and how they affect a
company's supply chain.

1. Calculating Safety Stock

Safety stock is normally required by companies to ensure that they have sufficient quantities of material in
stock. The safety stock is there to provide coverage for unexpected customer demand, damage in the
warehouse or required due to quality issues found in production. However, there are situations where
companies do not require inventory to be in stock. These “out of stock” situations should not be confused with
the highly undesirable “stock-out” predicament where customer’s orders cannot be shipped or production is
halted due to lack of lack of components. The “out of stock” situation is beneficial to companies when the
company has no demand for certain items and zero inventory means a no warehouse costs.

When supply chain professionals determine the optimum level of safety stock there are a number of scenarios
that they will consider. Many companies look at the costs involved in having a certain level of safety stock.
The costs include the initial purchase of the stock from the vendor, the cost of storing the material in the
warehouse and the potential depreciation of the material over time, especially when considering material that
has a finite shelf life.

However there is a cost associated with having a situation where the material is not in stock. Stock-outs can
cause non-monetary results such as loss of customer satisfaction when items cannot be shipped on time.
Whereas the cost of a production stoppage can be calculated when a production line stops and has to be
retooled for a new order when the stock-out of a component occurs.

There are three techniques that are used to calculate safety stocks; statistical based, fixed quantity and time
period based.

Statistical Based Safety Stock

The statistical method to calculate safety stock is based on the premise that is possible to mathematically
calculate the level of safety stock to prevent a stock-out situation. The traditional method used to statistically
calculate safety stock is the used of the normal distribution or bell-shaped curve. In a normal distribution
curve, the mid-point of the curve is the forecast, which represents the average value. As the curve moves away
from the center there is a deviation from the average and the probability of a high deviation from the forecast
is represented by a smaller and smaller percentage. For example a 48% deviation from the forecast may
represent a 2% possibility.
There are pros and cons of selecting a statistical based safety stock. Although the statistical method is based in
accurate mathematics, predicting business is not always as accurate. There are always situations that occur that
cannot be forecasted. For example, a statistical method may calculate an item to have a safety stock even when
the item is no longer required in manufacturing. In addition some business methods employed by companies to
improve efficiencies in the supply chain may work against the mathematical equations used in calculating
safety stock. Just-In-Time techniques can adversely affect the requirements of safety stock and render the
calculation inaccurate.

Fixed Safety Stock

Companies can decide to have a fixed value for the level of safety stock for some materials. This will require a
production planner to determine a value for the safety stock rather than rely on a quantity determined by a
statistical calculation. The value that is determined by planner will remain the same until manually changed.
When the actual inventory level reaches or falls below the safety stock level, this will trigger a replenishment
order for a quantity of material. The quantity of material on the replenishment order is determined by demand.
The fixed safety stock level can also be set to zero when a company wants to phase out an item, if it is being
superceded or the finished good is no longer being manufactured.

Time Period Based Safety Stock

The time period based safety stock level is used to calculate the stock required over a fixed period. For
example, if manufacturing demand requires 100 cases of part A to be consumed each day, the safety stock for a
week would be 700 cases. The time period based safety stock is therefore determined by the forecast for the
material in future periods. The forecast will include usually include a combination of actual demand from sales
orders placed by customers and a forecast based on a statistical calculation.
Whatever method is used to calculate safety stock, it should be monitored periodically to ensure that it is
accurate and satisfies the need it is intended for. Having safety stock in a warehouse has a cost associated with
it and unnecessary safety stock is a scenario that should be avoided.

2. Measuring Purchasing Performance

Measuring purchasing performance is important as the purchasing department plays an ever increasingly
important role in the supply chain in an economic downturn. A reduction in the cost of raw material and
services can allow companies to competitively market the price of their finished goods in order to win
business. An obvious performance measure of the success of any purchasing department is the amount of
money saved by the company. However there are a number of performance measurements that businesses can
use when they measure purchasing performance.

Purchasing Efficiency

Administrative costs are the basis for measuring purchasing efficiency. This performance measurement does
not relate to the amount of purchased items that the department has procured. The measurement relates to how
well the purchasing department is performing in the activities they are expected to perform against the budget
that is in place for the department. If the purchasing costs are within the budget then the efficiency of the
purchasing department will exceed expectations. If the department is using funds over and above the budget
then the purchasing function is not efficient.

Purchasing Effectiveness

The price that the purchasing department paid for an item is not necessarily a good measurement for
purchasing performance. The price of an item may fluctuate due to market conditions, its availability, and
other demand pressures; therefore the purchasing department may not be able to control the price. A popular
method of assessing purchasing effectiveness is to review the inventory turnover ratios. The ratio measures the
number of times, on average; the inventory is used, or turned, during the period. The ratio used to measure the
liquidity of the inventory. However, this is not always a great measure of purchasing effectiveness as seasonal
requirements for having items in stock can make this measurement inaccurate.

Purchasing Functionality

Purchasing performance can be measured against the functional requirements of the purchasing function. The
primary function of the department is to provide the correct item at the required time at the lowest possible
cost. The performance measurement can take into account these elements, but it does not take into account
factors that may relate to the supplier stability, material quality issues and supplier discounts.

Performance Measurements

The performance of the purchasing function can be measured using a variety of measurements. A company can
decide which of these measurements of effectiveness are relevant to the performance of their purchasing
department. The measurements can include,

• Cost Savings.

If the purchasing department procure an item at a lower price than they did previously, then it is a cost
saving. This can occur when a new supplier is found, a less costly substitute item is used, a new
 contract has been signed with the vendor, a cheaper transportation method has been found or the
purchasing department has negotiated a lower price with the existing supplier.

• Increased Quality.

When an item has improved quality either by using a different supplier or by negotiating with the
existing supplier, the improvement will be reflected in a reduction of waste or production resources.

• Purchasing Improvements.

Efficiencies in the method used in the purchasing department will increase effectiveness. These can
include the introduction of EDI, e-procurement systems, vendor managed inventory and pay on receipt
processes.

• Transportation Improvements.

When a purchasing department negotiates with a carrier or number of carriers to reduce the cost of
transporting items from the vendor to the production facilities, the unit cost of the item will be reduced.
This cost saving can be used as a measurement of effectiveness.

Purchasing Performance

A number of studies have been carried out on purchasing performance and the results have noted that there is
no one method that will cover every purchasing department. However, there are a number of key measures that
are found to be common in evaluating performance, namely; cost saving, vendor quality, delivery metrics,
price effectiveness and inventory flow. Although these key measures are common, the weight placed on these
measures is by no means uniform and will vary between industry to industry and business to business. In
addition the importance of these measures to the overall effectiveness of a purchasing department will change
over time and therefore need to be assessed and modified on a periodic basis.

Forecasting In The Supply Chain

Introduction

In the modern supply chain, forecasting is necessary for companies that manufacture items for inventory and
that are not made to order. Manufacturers will use material forecasting to ensure that they produce the level of
material that satisfies their customers without producing an overcapacity situation where too much inventory is
produced and remains on the shelf. Equally, the forecast must not fall short and the manufacturer finds them
without inventory to fulfill customer’s orders. The cost of failing to maintain an accurate forecast can be
financially catastrophic.
Forecasts are developed for a company’s finished goods, components and service parts. The forecast is used by
the production team to develop production or purchase order triggers, quantities and safety stock levels. The
forecast is not static and should be reviewed by management on a regular basis. This is to ensure that
information on future trends, the internal or external environment is incorporated into the forecast to give a
more accurate calculation.

Statistical Forecasting

In supply chain management software, the forecast is a calculation that is fed data from real time transactions
and is based on a set of variables that are configured for a number of statistical forecast situations. Planning
professionals are required to use the software to provide the best forecast situation possible and often this is
left unchecked without any review for long periods. To best use the forecasting techniques in the supply chain
software, planners should review their decisions with respect to the internal and external environment. They
should adjust the calculation to provide a more accurate forecast based on the current information they have.
Statistical forecasts are best estimates of what will occur in the future based on the demand that has occurred
in the past. Historical demand data can be used to produce a forecast using simple linear regression. This gives
equal weighting to the demand of the historical periods and projects the demand into the future. However,
forecasts today give greater emphasis on the more recent demand data than the older data. This is called
smoothing and is produced by giving more weight to the recent data. Exponential smoothing refers to ever-
greater weighting given to the more recent historical periods. Therefore a period two months ago has a greater
weighting than a period six months ago. The weighting is called the Alpha Factor and the higher the weighting,
or Alpha factor the fewer historical periods are used to create the forecast. For example, a high Alpha factor
gives high weighting to recent periods and demand from periods for a year or two years ago are weighted so
lightly that they have no bearing on the overall forecast. A low Alpha factor means historical data is more
relevant to the forecast.
Historical periods generally contain demand data from a fixed month, i.e. June or July. However, this
introduces error into the calculation as some months have more days than other months and the number of
workdays can vary. Some companies use daily demand to alleviate this error, although if the forecaster
understands the error, monthly historical periods can be used along with a tracking indicator to identify when
the forecast deviates significantly from the actual demand. The level at which the tracking signal flags the
deviation is determined by the forecaster or software and vary between industries, companies and products. A
small deviation may require intervention when the product being forecasted is high-value, whereas a low-value
item may not require the forecast be scrutinized to such a high level.

Non-Statistical Forecasting

Non-statistical forecasting is found in supply chain management software where demand is forecasted based
on quantities determined by the production planners. This occurs when the planner enters in a subjective
quantity that they believe the demand will be without any reference to historical demand. The other non-
statistical forecasting that occurs is when demand for an item is based on the results of materials requirements
planning (MRP) runs. This takes the demand for the finished good and explodes the bill of materials so that a
demand is calculated for the component parts. The component demand can then be amended by the planner
based on their assessment and knowledge of the current environment. The resulting forecast is based on
current demand and will not incorporate any demand from previous periods. Many companies will use a
combination of non-statistical and statistical forecasting across their product line.
Statistical forecasting is based on complex calculations and the future demand can be determined based on the
demand from historical periods. The forecast gives the planner a guide to future demand, but no forecast is
totally accurate and the planners experience and knowledge of the current and future environment is important
in determining the future demand for a company’s products.

3. Selecting A Third Party Logistics (3PL) Provider

Introduction

Third party logistics (3PL) companies are a becoming an important part of today’s supply chain. These
companies offer services that can allow businesses to outsource part of all of their supply chain management
function. Many 3PL companies offer a wide range of services including; inbound freight, freight consolidation,
warehousing, distribution, order fulfillment and outbound freight. The growth of 3PL companies has been
driven by the need for businesses to become leaner, reducing assets and allowing focus on core business
processes.

Rise Of Third Party Logistics Providers

The growth of 3PL companies began back in the 1980’s when businesses began to look for new ways in which
they could outsource logistics functions and concentrate on their core business. One company that has been
associated with the 3PL revolution is FedEx. The company’s overnight delivery service changed the way in
which business to business and business to customer transactions operated. This offered businesses the
opportunity of using just-in-time techniques, which saved warehousing space and reduced overall costs. The
introduction of efficient-consumer-response (ECR) techniques led to smaller and more efficient shipment
sizes, which in turn further reduced costs.
As companies saw the benefits of outsourcing delivery and warehousing functions, the number of third party
logistics companies began to rise offering an ever increasing number of services. The increasing numbers of
3PL’s inevitably led to increased competition between these firms, which led to greater savings for the
companies who employed them. The last decade has seen the 3PL provider transitioning from a local or
regional business to one that offers national or global coverage. In US, the 3PL market has been growing at a
compound annual rate of 14.2 percent since 1996 and in 2006; 3PL’s in the United States reported $89.4
billion in gross revenue.

Selecting A 3PL

Deciding to a use a third party logistics company is a decision that depends on a variety of factors that differ
from business to business. The decision to outsource certain business functions will depend on the company’s
plans; future objectives, product lines, expansion, acquisitions, etc.
Once a decision has been made to outsource certain processes then a company will begin a search for the right
3PL that fits all their requirements at the best possible price. There are three types of Third Party Logistics
Company that operate today.

• Asset Based
• Management Based
• Integrated Providers

Asset based third party logistics companies use their own trucks, warehouses and personnel to operate their
business. Management based companies provide the technological and managerial functions to operate the
logistics functions of their clients, but do so using the assets of other companies and do not necessarily own
any assets. The third category, Integrated Providers, can either be asset based or management based companies
that supplement their services with whatever services are needed by their clients.
When selecting a 3PL, the request for information (RFI) or quotation (RFQ) should be as detailed as possible.
The company that is selected should be able to fulfill all the logistics requirements and that can only be
assured if every requirement is communicated to potential companies. The RFI should include a detailed
description of the areas to be outsourced. This will usually include:

• The scope of the contract, including locations, facilities, departments.

• Information on volumes involved; number of deliveries, warehouse sizes, number of items, etc.
• The logistics tasks are to be performed, e.g. warehousing, transportation, etc.
• The level of performance required.

After the bids have been received by a company from the prospective 3PL’s, an evaluation would take place
where a multi-discipline team will review each bid based on a pre-defined set of criteria. These will include
some of the following.

• Does the 3PL provide the services required?

• Does the 3PL have the technology required to perform the tasks required?
• Does the company have the required warehouse space, dock capacity, warehouse personnel, etc.?
• Is the 3PL financially sound?
• Are the 3PL’s geographical locations suitable to cover the network?
 • Does the 3PL have the flexibility to respond to changes?
• Are the 3PL’s environmental policies compatible?
• Are the costs of the services detailed enough for comparison to other bids?
• Are the customer references acceptable?
• Is the 3PL a good cultural fit?

The selection team will usually review each of the bids based on the criteria and give each bidder a score.
Depending on the importance of each criteria, a weighting can be given which gives more importance for one
or more criteria in the selection process. Once the selection team has evaluated the bids, management will
often select the top two or three companies for site visits, face to face interviews and more detailed reviews of
financial records. Once a company has been identified contract negotiations would follow before a final
agreement could be reached.

4. Implementing a World Class Purchasing Organization

Executive Buy-In

Before implementing any purchasing best practices, there has to be the backing of senior company executives.
Without the buy-in of senior executives, including the CEO and CFO, any attempts at developing a world class
purchasing strategy will be smothered by middle management. Changes that have to be made in any company
must be backed by senior executives in order to achieve results.

Rationalization of Existing Data

Any company that has been procuring data over a period of time will have a database of vendors that contain
current, duplicate, out of date and incorrect data. If you company has a number of geographically separate
purchasing departments, the level of inaccuracy is multiplied. For a world class purchasing strategy to be
implemented, the data from each purchasing department has to be updated to reflect the current vendor data
and to be rationalized to eliminate duplicate, incorrect and unnecessary data. The benefits of having accurate
data to your company is that it allows decisions to be made accurately. It allows your purchasing department to
analyze spending at vendors that are used in more than one purchasing area. After a greater understanding of
where money is spent across the enterprise, the company will have a greater leverage with vendors.

Take Advantage of Vendor Incentive Programs

It has been the norm for companies to pay vendors as late as possible. If the vendor has a contract for 45 days
then they would never receive their payment before that 45th day. To encourage companies to pay their bills
prior to the negotiated contract date, vendors have offered rebates, discounts and other incentives. But vendors
have found that despite the incentives, companies still are not paying early. One theory is that companies enter
the payment terms into their ERP system and forget about it. Checks are cut based on that data and the vendor
incentives are never realized. A world class purchasing strategy should embrace these discounts and companies
should make sure that they are taking every incentive possible. In these difficult economic times, companies
cannot afford to pass up significant discounts. In addition, negotiations with vendors should also include
obtaining greater discounts for payment on receipt of goods or even pre-payment.

Implement Vendor Evaluation

A good purchasing strategy should include a method by which vendors are measured. The evaluation process
should include not only delivery performance, but track less obvious metrics such as under or over delivery,
quality of items delivered and the performance of the vendor’s customer service. These metrics may not
always be a measurable value, but sometimes the metric is subjective. If policy guidelines are implemented for
subjective evaluation, then all vendors can be measured equally. Don’t forget to let the vendors know they are
being evaluated. If they know their customers are watching them, perhaps they will raise their game.

Hire Purchasing Professionals

So many companies’ believe that basic clerical skills are the only pre-requisite for a position in the purchasing
department. This view is incredibly naïve considering that these clerks are in charge of spending vast amounts
of company resources. The purchasing professional is the key to implementing a world class purchasing
organization. The skills required for world class purchasing organizations include knowledge of the business
they are purchasing for, analytical skills, negotiation skills and interpersonal skills. By depriving your
purchasing department of employees versed in these skills, your company can find itself tied into contracts
will the wrong vendors, for the wrong material, and at the wrong price

Reducing the Number of Vendors

Companies have hundreds of vendors, some have thousands, many have thousands, even tens of thousands.
Having thousands of vendors in your system, not only takes a considerable amount of maintenance, it can also
be extremely costly. If a purchasing department orders items from twenty different vendors each day, that can
mean twenty purchase orders that have to be sent, twenty shipping costs that need to be paid and twenty goods
receipts that need to be processed when the goods arrive. In addition the added costs, there are probably
savings that are not being realized. How many of those twenty vendors sell the same or similar products. If the
twenty vendors are reduced to five, then the processing costs will be reduced and probably the cost of the
material has been negotiated lower.

Centralized Purchasing

If your company has a number of geographically dispersed locations, you may think that it is impossible to
implement a world class purchasing strategy. It is prudent for companies need to think of their overall spend as
a central function. Having a centralized purchasing organization, a company can review its total purchasing
and select vendors that can provide a majority of items at the best costs. This scenario will not cover all items
used at all of the locations and the central purchasing organization would have to work with the locations to
identify local suppliers that facilitate the needs of the remote location

Getting the Most from Vendors

Negotiating an agreement with a vendor can be a long drawn out affair with neither party happy with the
outcome. Having a poor relationship with your vendor at the start of the contract is not the way in which world
class purchasing organizations operate. Vendors are an important part of your supply chain. The materials they
provide are required on specific dates so that your order is shipped to the customer on the date promised.
Making your vendor a partner rather than just another vendor will help ensure that your orders are correct and
on time. Negotiations with your vendors should focus on the benefits of being a vendor; showing them that if
you are successful, they will be successful. Negotiations that focus on penalty clauses and fines for poor
quality and missed delivery dates will leave the vendor less than willing to accomodate your requirements

Maximizing Technology

There are some companies that still use rolodexes, paper purchase requisitions and call in their purchase orders
to vendors. Most have some kind of purchasing software, even if it an Excel spreadsheet, that tracks orders and
overall spend. With the introduction of Enterprise Resource Planning (ERP) software, companies are able to
integrate their purchasing departments into their supply chain to take advantage of real-time data. However,
that is where many companies stop. World class purchasing strategies go further to reap the benefits offered to
them by their ERP systems. Companies can adopt workflow techniques within their ERP systems to automate
approvals and payments, thus reducing time that the purchasing staff has to intervene. Data that is produced by
thousands of purchasing transactions can be used in data warehouses to help purchasing professionals with
metrics in vendor evaluation and contract negotiation.

5. Strategic Supply Chain Management

Introduction

Supply chain management operates at three levels; strategic, tactical and operational. At the strategic level,
company management makes high level strategic supply chain decisions that are relevant to whole
organization. The decisions that are made with regards to the supply chain should reflect the overall corporate
strategy that the organization is following.
The strategic supply chain processes that management has to decide upon will cover the breadth of the supply
chain. These include product development, customers, manufacturing, vendors and logistics.

Product Development

Senior Management has to define a strategic direction when considering the products that the company should
manufacture and offer to their customers. As product cycles mature or products sales decline, management has
to make strategic decisions to develop and introduce new versions of existing products into the marketplace,
rationalize the current product offering or whether develop a new range of products and services. These
strategic decisions may include the need to acquire another company or sell existing businesses. However,
when making these strategic product development decisions, the overall objectives of the firm should be the
determining factor.

Customers

At the strategic level, a company has to identify the customers for its products and services. When company
management makes strategic decisions on the products to manufacture, they need to then identify the key
customer segments where company marketing and advertising will be targeted.

Manufacturing

At the strategic level, manufacturing decisions define the manufacturing infrastructure and technology that is
required. Based on high level forecasting and sales estimates, the company management has to make strategic
decisions on how products will be manufactured. The decisions can require new manufacturing facilities to be
built or to increase production at exiting facilities. However, if the overall company objectives include moving
manufacturing overseas, then the decisions may lean towards using subcontracting and third party logistics. As
environmental issues influence corporate policy to a greater extent, this may influence strategic supply chain
decisions with regards to manufacturing.

Suppliers

Company management has to decide on the strategic supply chain policies with regards to suppliers. Reducing
the purchasing spend for a company can directly relate to an increase in profit and strategically there are a
number of decisions that can be made to obtain that result. Leveraging the total company’s purchases over
many businesses can allow company management to select strategic global suppliers who offer the greatest
discounts. But these decisions have to correspond with the overall company objectives. If a company has
adopted policies on quality, then strategic decisions on suppliers will have to fall within the overall company
objective.

Logistics

As well as strategic decisions on manufacturing locations, the logistics function is key to the success of the
supply chain. Order fulfillment is an important part of the supply chain and company management need to
make strategic decisions on the logistics network. The design and operation of the network has a significant
influence on the performance of the supply chain. Strategic decisions are required on warehouses, distribution
centers which transportation modes should be used. If the overall company objectives identify the use of more
third party subcontracting, the company may strategically decide to use third party logistics companies in the
supply chain.
Strategic decisions determine the overall direction of company’s supply chain. They should be made in
conjunction with the companies overall objectives and not biased towards any particular product or regional
location. These high level decisions can be refined, as required, to the specific needs of the company at the
lower levels which allow for tactical and operational supply chain decisions to be made

Tactical Supply Chain Management

Tactical supply chain management decisions are made at a national or regional level to produce efficiencies and
cost reductions. These articles examine the variety tactical decisions companies make and the effects of those
decisions on the supply chain

1. Public Warehousing In The Supply Chain

Introduction

A company’s supply chain will incorporate some warehousing function. This can be company-owned, owned by a
third party logistics (3PL) company or could be a public warehouse. At certain times, extra warehouse space is
required due to any number of factors including; seasonal inventory, warehouse re-organization or warehouse
damage. Whatever the reason the use of public warehousing is a useful tool for the supply chain manager as they
try to find the greatest efficiencies in the supply chain.
The public warehouse is not only a facility where a company can store their products, but the public warehouse
offers inventory management, physical inventory counts and shipping functionality. The public warehouse
charges their clients for a certain rate for the goods stored, the volume of the warehouse used and the services the
client wishes to use. The company using the public warehouse does not have to employ warehouse staff, does not
require any inventory software or warehouse equipment. The owner of the public warehouse is responsible for the
costs and passes this on to their clients based on the rate they are charged.
Although most companies see public warehousing as a short-term solution it can often turn into a long-term
relationship as companies been accustomed to convenience of the public warehouse services. Companies that own
and operate public warehouses, invest significantly in modern facilities to remain competitive. They offer clients
increasing levels of flexibility in order to retain and attract additional clients. Public warehouses offer companies
a range of labor solutions including picking, packing, inventory control software and dedicated workforce. Public
warehouses will also allow clients to bring in their own ERP or warehouse software so that the public warehouse
becomes a satellite location with real-time data.

Criteria for Choosing A Public Warehouse

Because of the increasing competition between the public warehouse operators, potential clients should review
the capabilities of each potential warehouse to identify which would be the best fit. Each client will have a
number of factors that need to be considered when selecting a public warehouse. Companies have a variety of
reasons why they require an outside warehouse, as well as their short-term and long-term needs and the price they
are willing to pay for the service. However, the majority of the following criteria is likely to be used by all
companies comparing public warehouse sites.

• Geography
• Technology
• Expansion
• Company Network
• Flexibility

Geography

The location of the public warehouse can be important to some clients, and less to others. If a large volume of
items is to be moved between the company warehouses and the public warehouse, a location closer to the
company site may be more advantageous. However, some clients may require a public warehouse to be closer to
their customers if items are to be moved there from a number of company sites.

Technology

Although most public warehouses offer modern facilities and technology, the level of technology may vary, for
example, one public warehouse may offer a warehouse management system that is not compatible with common
ERP systems. This can be less attractive than a warehouse that allows clients a range of warehouse solutions or
for clients to use their own systems.

Expansion

Depending on a company’s needs, the amount of space required at a public warehouse is likely to change during
the period that the space is required. Although space requirements are often unknown at the beginning of a
contract with a public warehouse, the agreement should include an expansion clause. This will guarantee that the
public warehouse operator will accommodate any future space requirements a company may need.

Company Network

When a company negotiates for space in a public warehouse, future requirements for other warehousing needs
would probably not be known. However, a public warehouse that is part of a warehouse network may be able to
offer national or global supply chain management services that smaller public warehouse operators cannot.

Flexibility

The flexibility of the public warehouse operator is an important consideration. Clients can need warehouse
functionality at short notice and warehouse operators that can guarantee rapid access to the facility, with trained
staff and suitable technology are at an advantage

2. Origins and Principles of Lean Manufacturing

Introduction
The current push towards lean manufacturing originates from the Toyota Production System which is often
referred to as Just In Time (JIT) Production. The Toyota Company became successful after World War 2 when
Japanese factory owners adopted a number of American production and quality techniques. The manufacturing
techniques of Henry Ford and the Statistical Quality Control ideas of Edwards Deming became the foundation of
Toyota’s production process.

Unlike the American automotive industry Toyota encouraged employees to be a part of the production process.
The company introduced quality circles which was a group of workers who meet to discuss workplace
improvement. Quality circle members make presentations to management with regarding the quality of
production.

Toyota developed a set of procedures that reduced the time required for setup and changeovers. Unlike Ford’s
production, Toyota developed manufacturing in smaller batches and this required a set of processes that reduced
setup and changeover times. The resulting procedure was Single Minute Exchange of Die (SMED). There are
seven steps used in the SMED method for changeover, including streamlining the external and internal activities.

The developments made by Toyota were adopted by other Japanese manufacturers but none were as successful. In
the 1980’s American companies began to adopt some of the processes developed by Toyota and gave these names
such as Continuous Flow Manufacturing (CFM), World Class Manufacturing (WCM) and Stockless Production.

Principles of Lean Manufacturing

The ultimate goal for a company that adopts lean manufacturing processes is to reduce waste. An average
company will waste a significant amount of resources. In cases where the manufacturing process is outdated the
level of waste can be close to 90%. By adopting lean manufacturing processes the waste can be reduced to around
25-35%. Lean Manufacturing processes can improve -

• Material Handling
• Inventory
• Quality
• Customer Satisfaction

Material Handling

The benefits in material handling when lean manufacturing procedures are deployed include fewer moves of
material, shorter travel distances in the warehouse and simpler picking routes in the warehouse. These also
contribute to savings in inventory and improvements in quality.

Inventory

By using smaller lots, the inbound and outbound queues are smaller. This reduces the inventory required to be in
the queue and therefore the inventory level overall.

Quality

Smaller lots mean that any quality issues that arise can be dealt with at the time of manufacture. In manufacturing
processes with larger lot sizes, quality issues may not be identified until late into the process and can be costly to
correct, both in time and resources.

Customer Satisfaction

Improvements in material handling, inventory and quality all lead to a more successful manufacturing operation.
If items are produced on time and delivered to a customer by the delivery due date, customer satisfaction will
increase. The same is true if the items sent to the customer are of a higher quality standard. This will reduce the
incidence of repairs, returns and customer complaints.

3. Introduction To Vendor Evaluation

Introduction

As a consumer, when you want to purchase an item, whether it is a new car or a flat screen television, you will
most likely do some research on the prices of your local stores or from vendors on the internet. When you have
narrowed your search you then look at other criteria that may be important to you, like warranty or availability.
Lastly you will look at other less tangible criteria such as your previous experiences with the vendor and how
their customer service was. This behavior is exactly the same for companies when they want to evaluate the
vendors in their supply chain.

Unless your company only uses one vendor for each item they purchase, there will enviably be occasion when a
decision has to be made as to which vendor gets your business. There are a number of different scenarios when
this will occur, for example when the item is purchased for the first time and when an item is no longer single
sourced.

Purchasing An Item For The First Time

When a decision has to be made between vendors, the purchasing department will use some vendor evaluation
method to be their tool in the decision. If the item is to be bought for the first time, the purchasing department
may have contacted a number of vendors and sent them a Request for Quotation (RFQ). Each vendor would then
complete the RDQ with the information that was required, normally price and terms. The purchasing department
would then use these completed quotations, in conjunction with other information they have collected on the
vendors, to make short list for further evaluation or make a final selection. The purchasing department would
evaluate the vendors based on a number of criteria they had decided upon which may include objective criteria
such as price and warranty and subjective data which would include past experience with the vendor. Based on
the weighting given to these criteria the purchasing department would be able to fairly evaluate each vendor.

Choosing Between Vendors

If the sourcing of an item has been from a single vendor but another vendor has been approved to supply the same
item, a decision would need to be made on vendor selection when a requisition has been received by the
purchasing department. Many companies use a vendor evaluation tool that allows transaction data to be analyzed
to give a comparison between vendors. The vendor evaluation uses criteria that have been determined by the
purchasing department to compare vendors such as price, delivery reliability, delivery date adherence and quality
of the item. There are any numbers of criteria that can be used in a comparison and these are usually weighted so
that important criteria are given more credence. For example, a company may decide that quality of the items it
receives from vendors is more important than price, which in turn is more important that delivery reliability. The
company would then weight these criteria so that the overall score reflects that requirement.

Conclusion

Vendor evaluation is important as it can reduce supply chain costs and improve the quality and timeliness of the
delivery of items to your company. The skill in evaluating vendors is to determine which criteria are important
and the weighting that these criteria are given. It is important to remember that these criteria may be different for
each item you are sourcing and possibly different between regions or countries. Objective data is useful to
compare the information that you can obtain from each purchase order and goods receipt, but sometimes the
subjective data that your purchasing agents can provide such as customer service and the willingness of the
vendor to accommodate your requirements, is as or more important in a vendor evaluation.
4. Pallet Storage Methods In The Warehouse
Introduction

Many companies store their products on pallets in the warehouse. There are a number of pallet storage methods
that allow the warehouse staff to store pallets efficiently. This article will examine a number of the pallet storage
systems that are commonly used.

• Block Stacking
• Stacking Frames
• Single-Deep Pallet Rack
• Double Deep Rack
• Drive-In Rack
• Pallet Flow Rack
• Push Back Rack

Block Stacking

Block stacking refers to unit loads stacked on top of each other and stored on the warehouse floor in lanes or
blocks. The pallets are stacked to a specific height based on a number of criteria such as pallet condition, weight
of the load, height clearance and the capability of the warehouse forklifts.

The pallets are retrieved from the block in a last in, first out (LIFO) manner. This does not allow for removing
stock based on date basis or FIFO. Removal of stock can cause honeycombing to occur where empty spaces occur
that cannot be filled until the whole lane is empty. This method is cheap to implement as it involves no racking
and can be operated in any warehouse with open floor space.

Stacking Frames

Pallet stacking frames are made up from decks and posts that can be erected and moved if necessary. The stacking
frame allows pallets to be stored several high and are particularly useful when the pallets to be stored are not
stackable.

Many companies will use stacking frames in the warehouse when they need temporary racking during period
busy periods. With stacking frames the issue of honeycombing exists similar to block stocking.

Single-Deep Pallet Rack

Single-deep pallet racking provides access to each pallet stored in the rack. This gets around the honeycombing
issues of stacking frames and block stacking. When a pallet is removed the space is immediately available for a
new pallet to be placed in that space. This type of racking can be configured in any number of ways with various
heights. Most warehouses today have this type of racking in use. The major disadvantage is that the racks require
significant floor space for suitable aisles.

Double-Deep Pallet Rack

The double-deep pallet rack is a variant on the single-deep rack that incorporates two single racks that are placed
together. This reduces the number of aisles required but this type of racking is susceptible to honeycombing, so
may not be as efficient as single-deep racking. In addition a double-reach forklift is required to place and remove
pallets from the racking.

Drive-In Rack
Drive-In racks provide five to ten pallet load spaces similar to the double-deep racking. The drive-in lanes provide
access for the forklift to place and remove stock. However the forklift has a limited space to maneuver and this
increases the time required to place and remove pallets. The drive-in rack is similar to block stacking as the LIFO
principle is used for pallet retrieval.

Pallet Flow Rack

The pallet flow rack operates whereby the load is moved from one end of the rack on a conveyor that allows the
pallets to be removed in a FIFO manner. Once a pallet is removed the next pallet moves into the position of the
pallet that was removed. This racking solution is suitable for warehouses that have a high throughput, but is an
expensive option.

Push Back Rack

The push back rack is a LIFO solution where the load is placed into storage using a rail-guided carrier. When a
load is placed into storage the load pushes the other loads back into the storage area. When a load is removed the
next load in the lane moved to the position where the other load was removed. This means that each lane with
stock has a load in the optimum position for removal. This racking method may not be suitable for warehouses
require FIFO.

5. Cross Docking in the Warehouse

Introduction

The term cross docking refers to moving product from a manufacturing plant and delivers it directly to the
customer with little or no material handling in between. Cross docking not only reduces material handling, but
also reduces the need to store the products in the warehouse. In most cases the products sent from the
manufacturing area to the loading dock has been allocated for outbound deliveries. In some instances the products
will not arrive at the loading dock from the manufacturing area, but may arrive as a purchased product that is
being re-sold or being delivered from another of the companies manufacturing plants for shipment from the
warehouse.

Benefits

Many companies have benefitted from using cross docking. Some of the benefits include:

• Reduction in labor costs, as the products no longer requires picking and putaway in the warehouse.
• Reduction in the time from production to the customer, which helps improve customer satisfaction.
• Reduction in the need for warehouse space, as there is no requirement to storage the products.

Types of Cross Docking

There are a number of cross docking scenarios that are available to the warehouse management. Companies will
use the type of cross docking that is applicable to the type of products that they are shipping.

• Manufacturing Cross Docking – This procedure involves the receiving of purchased and inbound products
that are required by manufacturing. The warehouse may receive the products and prepare sub-assemblies
for the production orders.
• Distributor Cross Docking – This process consolidates inbound products from different vendors into a
mixed product pallet, which is delivered to the customer when the final item is received. For example,
computer parts distributors can source their components from various vendors and combine them into one
shipment for the customer.
 • Transportation Cross Docking – This operation combines shipments from a number of different carriers in
the less-than-truckload (LTL) and small package industries to gain economies of scale.
• Retail Cross Docking – This process involves the receipt of products from multiple vendors and sorting
onto outbound trucks for a number of retail stores. This method was used by Wal-Mart in the 1980's. They
would procure two types of products, items they sell each day of the year, called staple stock, and large
quantities products which is purchased once and sold by the stores and not usually stocked again. This
second type of procurement is called direct freight and Wal-Mart minimize any warehouse costs with
direct freight by using cross docking and keeping it in the warehouse for as little time as possible.
• Opportunistic Cross Docking – This can be used in any warehouse, transferring a product directly from
the goods receiving dock to the outbound shipping dock to meet a known demand, i.e. a customer sales
order.

Products Suitable for Cross Docking

There are materials that are better suited to cross docking than others. The list below shows a number of types of
material that are more suited to cross docking.

• Perishable items that require immediate shipment

• High quality items that do not require quality inspections during goods receipt
• Products that are pre-tagged (bar coded, RFID), pre-ticketed, and ready for sale at the customer
• Promotional items and items that are being launched
• Staple retail products with a constant demand or low demand variance
• Pre-picked, pre-packaged customer orders from another production plant or warehouse

6. Less Than Truckload (LTL)

Introduction

Products are moved from point to point by a number of different modes of transport; air, rail, water and truck. In
the US, the movement of goods by truck offers shippers infinite flexibility due at a relatively low cost. Truck
transportation can move large items faster than rail as the shipment is not dependent on the railroads timetable.
The general freight carriers in the US offer two types of service, Full Truckload (FTL) service or Less Than
Truckload (LTL). While the FTL carrier moves full containers or trucks of one product from one customer, the
LTL carrier moves goods from many different customers on one truck. The LTL carrier offers customers a more
cost-effective method of shipping goods than the FTL operator.

How LTL Works

Within a local area the LTL freight operator has a number of vehicles which collect shipments from their
customers. After finishing the daily collection, the shipments are taken to a terminal where the vehicles are
unloaded. Each shipment is weighed and rated which allows customer bills to be processed. The individual
shipment is loaded on to an outbound vehicle which contains shipments from other customers bound for the same
geographic area. The outbound shipments are trucked to appropriate regional terminals, where they are unloaded.
The shipments are sorted and placed on local vehicles for delivery. Each individual shipment is handled a number
of times from the time it is picked up from the customer until it reaches its final delivery location.

Advantages of LTL Carriers

The primary advantage of using a LTL carrier is cost. The price of sending a shipment using a LTL rather than a
FTL carrier is significantly lower. The LTL carrier competes with parcel carriers, who generally will not accept
shipments of more than 70 to 100 pounds in weight. This competition gives usually results in LTL carriers
offering lower rates per pound than parcel carriers.
History of LTL Carriers

The US government started regulating the trucking industry in 1935 under the guidance of the Interstate
Commerce Commission (ICC). The Motor Carrier Act of 1935 required new truckers to seek a "certificate of
public convenience and necessity" from the ICC. The act required motor carriers to file their tariffs with the ICC
30 days before they became effective. The tariffs were then available to be viewed by any interested party. The
tariff could then be subject to a challenge by another carrier or railroad which could lead to a suspension of the
tariff until an investigation could be carried out.

In 1948, despite a veto from President Truman, the Congress allowed carriers to fix prices and allow them to be
exempt from any antitrust legislation. For the next 30 years competition was virtually extinguished as the ICC
denied applications from new carriers. The industry began to change in the early 1970’s when first the Nixon,
then the Ford and Carter administrations implemented a number of acts to reduce price fixing and collective
vendor pricing. The final part of the deregulation was the Motor Carrier Act of 1980. The effect of the new law
resulted in intense price competition and lower profit margins, with thousands of new low-cost, non-union
carriers entering the market. Between 1977 and 1982, the average LTL rate fell by up to 20%. The trucking
industry changed after deregulation. The number of carriers doubled between 1980 and 1990, with over 40,000
carriers in the US. Union membership fell sharply between 1980 and 1985, dropping from 60% to 28%.

Current Conditions

Changes in the law did open the industry up to competition but now the number of carriers is significantly lower
than the years after deregulation. The LTL market is estimated at approximately $30 Billion, but currently there is
overcapacity, which has could be as high as 15%. This, combined with the slowing economy, will inevitably lead
to more carriers seeking Chapter 11 protection leading to job losses in the union and non-union sectors.

7. Warehouse Best Practices

Companies are constantly trying to find ways to improve performance and warehouse operations is area where
supply chain managers can focus to gain maximum efficiency for minimum cost. To get the most out of the
operation, a number of best practices can be adopted to improve productivity and overall customer satisfaction.
Although best practices vary from industry to industry and by the products shipped there are a number of best
practices that can be applied to most companies.

When considering the level of effort involved in warehouse operations, the greatest expenditure of effort is in
the picking process. To gain efficiencies in picking the labor time to pick orders needs to be reduced and this
can achieved in a number of ways. Companies with the most efficient warehouses have the most frequently
picked items closest to the shipping areas to minimize picking time. These companies achieve their
competitive advantage by constantly reviewing their sales data to ensure that the items are stored close to the
shipping area are still the most frequently picked.

Warehouse layout is also important in achieve greater efficiencies. Minimizing travel time between picking
locations can greatly improve productivity. However, to achieve this increase in efficiency, companies must
develop processes to regularly monitor picking travel times and storage locations.

Warehouse operations that still use hard copy pick tickets find that it is not very efficient and prone to human
errors. To combat this and to maximize efficiency, world class warehouse operations had adopted technology
that is some of today’s most advanced systems. In addition to hand-held RF readers and printers, companies
are introducing pick-to-light and voice recognition technology.

In a pick-to-light system, an operator will scan a bar-coded label attached to a box. A digital display located in
front of the pick bin will inform the operator of the item and quantity that they need to pick. Companies are
typically using pick-to-light systems for their top 5 to 20% selling products. By introducing this system
companies can gain significant efficiencies as it is totally paperless and eliminates the errors caused by pick
tickets.

Voice picking systems inform the operator of pick instructions through a headset. The pick instructions are sent
via RF from the company’s ERP or order management software. The system allows operators to perform pick
operations without looking at a computer screen or deal with paper pick tickets. Many world class warehouse
operations have adopted voice picking to complement the pick-to-light systems in place for their fast moving
products.

Although many companies will not be able to afford new technologies for picking, we’ve seen here that there
are a number of best practices that can be adopted to improve efficiency and reduce cost.

8. Tactical Supply Chain Management

Introduction

Tactical supply chain decisions focus on adopting measures that will produce cost benefits for a company.
Tactical decisions are made within the constraints of the overarching strategic supply chain decisions made by
company management.

The strategic supply chain decisions cover the breadth of the supply chain for the entire company. Tactical
supply chain decisions take the strategic message and focus on creating real benefits for the company. These
can include tactical decisions in manufacturing, logistics, suppliers and product development.

Manufacturing

Strategic decisions may be made by company executives about the number and location of manufacturing sites
to be operated. However, it is at a tactical level that decisions are made on how to produce the products are the
lowest cost. Tactical decisions may be made as to the adoption of manufacturing methodologies such as
kanban or just-in-time. Tactical decisions may be required at a regional level by using technology that is
available that reduces material wastage, but cannot be exported to other manufacturing plants.

Logistics

Although strategic company decisions may require an in-house logistics function to be operational, a tactical
decision may be required to use a third party logistics company in a region or country where transportation
costs are high and cost benefits can be achieved by outsourcing. Similarly in countries where land costs are
high, construction of warehousing facilities may be cost prohibitive and despite not following the strategic
vision, a tactical decision is made to use public warehousing.

Suppliers

Many companies recognize the cost benefits of using global suppliers and adopt strategic supply chain policies
to take advantage. At a tactical level, management has to work within strategic guidelines to identify and
negotiate the terms that will realize the greatest cost benefit across the company.

Product Development

Companies make strategic decisions on the product lines they are committed to producing. Tactical decisions
have to be made as to the particular products that should be developed. If a company makes a strategic
decision to introduce a new line of MP3 players in Europe, the company has to make tactical decisions
regarding the specifications of the players, what countries they will be sold in and the market segment they
will targeted at where the most profit can be achieved.
The tactical supply chain decisions that a company makes are not made in isolation but within the framework
of the strategic supply chain decisions made at a global level, which in turn are based on the global objectives
of the company.

Operational Supply Chain Management

Operational supply chain management decisions are made daily to ensure the efficient flow of material. These
articles examine the variety operational decisions that companies make and the effects of those decisions on
the supply chain.

1. Cycle Counting In The Warehouse

Cycle counting is a popular inventory counting solution that allows businesses to count a number of items in a
number of areas within the warehouse without having to count the entire inventory. Cycle counting is a
sampling technique where count of a certain number of items infers the count for the whole warehouse. This
sampling method is used by pollsters every day where they measure the opinion of a small number of the
people and infer that is the opinion of the population.

When a cycle count is performed, there are two inferences that are made. The primary inference is that the
accuracy of the items in the cycle count can be used to determine the accuracy of the items in the warehouse as
a whole. The other inference is that if an error is found in the cycle count then that error could be expected to
occur for other items in the warehouse.

Types Of Cycle Counting

There are a number of types of cycle counting that can be used:

• Control Group
• Random Sample
• ABC Analysis

Control Group Cycle Counting

When a company starts using cycle counting they may use a control group to test that the method they are
using to count items will give the best results. The process usually focuses on a small group of items that are
counted many times in a short period. This repeated count process will show any errors in the count technique
which can then be corrected. The process is continued until the technique has been confirmed to be accurate.

Random Sample Cycle Counting

When a number of items to be counted are chosen at random, this is process known as random sample cycle
counting. When a company’s warehouse has a large quantity of similar items, they can randomly select a
certain number of items to be counted. The count can be performed each day or workday so that a large
percentage of the items in the warehouse are counted in a reasonable period.

Two techniques can be used in random sample cycle counting; constant population counting and diminished
population counting.

Constant population counting is where the same number of items are counted each time a count is performed.
This can mean that certain items are counted frequently and some items are not counted, as the selection of
items to be counted is random.
Diminished population counting is a technique where a number of warehouse items are counted and then
excluded from being counted again until all of the items in the warehouse are counted. Each count selects
items from an ever-decreasing number of eligible items to be counted.

ABC Cycle Counting

ABC cycle counting is an alternative to random sample counting. This method uses the Pareto principle as the
basis for this technique. The Pareto principle states that, for many events, roughly 80% of the effects come
from 20% of the causes. The ABC cycle counting method uses this principle to assume that 20% of the parts in
a warehouse relate to 80% of the sales, these are the “A” items. The principle is then extended to two other
categories where “B” items account for 30% of the items and 15% of sales and “C” items represent 50% of the
items in the warehouse, but only 5% of sales.

Before a cycle count can be performed, the items in the warehouse have to be identified as A, B or C items.
This is usually achieved with the help of a computer system, such as inventory control software. Once each of
the items in the warehouse has been assigned a category, the number of times each category should be counted
needs to be determined. The items with the highest sales value should be counted more frequently than items
that have low sales. Therefore, an item that has been assigned as an “A” item will be counted more frequently
than items that are designated as “C” items.

The ABC cycle count does have issues. Warehouses with a large number of distinct items may find that they
are counting many times a day. The warehouse may not have enough resources to complete the required
number of counts. Another issue is that due to the infrequency of counting of “C” items, the inventory
accuracy of these items may be low

2. Order Picking In The Warehouse

Introduction

Order picking can be defined as the activity by which a small number of goods are extracted from a
warehousing system, to satisfy a number of independent customer orders. Picking processes have become an
important part of the supply chain process. It is seen as the most labor-intensive and costly activity for almost
every warehouse, where the cost of order picking is estimated to be as much as 55% of the total warehouse
operating expense. As the order picking process involves significant cost and can affect customer satisfaction
levels, there have been increasing numbers of process improvements proposed to help companies with this
supply chain issue.

Solutions For Order Picking

A number of supply chain academics such as G.P. Sharp and Edward Frazelle have proposed a number of ways
of classifying the order picking system. Four solutions have been identified for order picking.

• Picker to Part
• Part to Picker
• Sorting System
• Pick to Box

Picker To Part

This particular method is very common and found in most warehouse environments. The process involves a
storage area, a picking area and a material handing system that is used to refill the picking locations from the
storage area, which can be forklift based or more specialized such as gravity flow racks. The storage area will
contain the items required to fulfill the customer orders. The picking operator can then pick the items for each
customer order from the items stored in the picking area. As all the items are in a smaller area than the regular
warehouse, the picking operator can fulfill the order more efficiently than if they had to pick the items from
the general storage area in the warehouse. The gravity flow racks are especially useful for items that are
commonly ordered so the picking operator can be in one location and pick items from the trays in front of
them. There are a number of technological advances in “picker to part” processes such as “pick to light” or
“voice picking”. These systems allow picking operators are informed which item to pick based on a light
appearing on the item location or a voice informing the operator on a headset which item to pick.

Part To Picker

The part to picker method employs the same physical locations as the previous method; storage area, picking
area and a material handling system that moves the items from the storage area to the picking area. The
difference with this method is that the picking area is made up of a series of picking bays. The items are
moved from the storage area and delivered to the picking bays. Each bay receives the items for one or more
orders. The picking operator collects the items delivered to their bay and the customer order is fulfilled in this
manner. This method can be subject to wasted labor as picking operators can find themselves waiting for items
to be delivered to their picking location.

Sorting System

The sorting process including the requirement for a picking area, a storage area, replenishment of the picking
area and a sorter. This method uses automatic material handling system consisting of multiple conveyors and a
number of sorting devices. The items are placed on a conveyor in the storage area and the items are sorted for
each particular order. The operator in the picking area collects the items that have been sorted for a customer
order and processes that order. The efficiency is gained because the operator does not have to consume time
collecting individual items.

Pick To Box

Pick to box is similar to the sorting solution as it uses the same elements; a picking area, a storage area,
replenishment of the picking area and a sorter. The picking area is organized so that there are a number of
picking zones connected by a conveyor system. The operator fills the box with the items on a customer order
and the box moves to the picking zones until the customer order is complete and it is then ready for shipment
to the customer. The efficiencies are gained because the operator does not have to consume time collecting
individual items, but the cost of the initial set up of this solution could negate any cost benefits that the
solution offers.

Choosing an order picking system depends on any number of requirements such as cost, complexity, number
of customer orders, size and number of items, etc. Every company has a unique requirement and one order
picking solution may suit one business and not another. Determining the requirements will ensure that the most
efficient order picking solution is selected.

3. Six Sigma Terminology

Six Sigma is a business management strategy that was initially developed by Motorola in the 1980’s, and now
is used in many Fortune 500 companies. It is used primarily to identify and rectify errors and defect in a
manufacturing or business process. Six Sigma uses a number of quality methods and tools that are used by
professionals within the organization, who have been trained on Six Sigma techniques. Often the terms used in
Six Sigma are sometimes misleading, so listed below are some of the more frequently used with an
explanation of the term.

Executive Leadership

This role can include the CEO or other top management. They are responsible for setting up a vision for a Six
Sigma implementation.

Champion

The champion can be defined as a person in a company’s organization who 'champions' a Six Sigma project. It
can be used more specifically to refer to a senior manager who champions the project, ensures that it is
properly resourced and uses their authority to overcome organizational barriers.

Master Black Belt

The Master Black Belt is a expert with extensive experience and technical expertise in all aspects of Six
Sigma. The Master Black Belt is responsible for selecting, training and mentoring black belts within an
organization. The Master Black Belt will often be involved in the selection of and approach to projects. They
will also be responsible for ensuring that the standards of the Six Sigma program are maintained.

Black Belt

A Black Belt is a full-time professional who acts as a team leader responsible for the operation and outcomes
of Six Sigma projects. To become a Black Belt it is required that the person demonstrate mastery of Six Sigma
tools, through an examination and experience. Black Belt training course can involve four to five weeks of
classroom training in methods, statistical tools, and team skills, in addition to a completed project. The
American Society for Quality (ASQ) offers a Certified Six Sigma Black Belt qualification.

Green Belt

A Green Belt is a member of an organization who has been trained on in Six Sigma methodology and
participates in projects as part of their full time job. They may either work as part of a team, led by a Black
Belt, or lead smaller projects, with a Black Belt acting as mentor.

Sponsor

The project sponsor is a senior manager who can signs off on the resources, defines the objectives and evaluate
the outcomes. The project sponsor is sometimes known as the project champion, although the champion can be
used to describe anybody who champions a Six Sigma project.

Change Agent

A Change Agent is a person who leads change within the organization by championing the change and
managing and planning its implementation. The Change Agent position can be official or voluntary.

Big Y and Little y

The important high level measure that a Six Sigma project seeks to improve is known as the Big Y . Big Y
should be linked to the critical customer requirements. The Big Y is often used to generate little y operational
objectives that must be improved to achieve Big Y improvements.

Define for Six Sigma (DFSS)

DFSS is used to design a new process, product or service, or to redesign an existing process, product or service
from scratch. This contrasts with the normal Six Sigma approach that is used to improve existing processes,
products or services. DFSS uses the DMADV sequence rather than the DMAIC sequence.

DMADV

DMADV refers to the sequence of steps used in Design For Six Sigma (DFSS), instead of the DMAIC
sequence which is used in regular Six Sigma. The DMADV sequence can also be referred to as DMADOV
where the additional O stands for Optimize.

• Define - Define the project objectives, similar to DMAIC.

• Measure - Measure the expectations of all the stakeholders, particularly the customers. Also use
benchmarking and competitor analysis.
• Analyze - Identify and analyze the alternative solutions
• Design - Carry out the detailed design
• Optimize - Use experimental design, simulation etc. to optimize the solution
• Verify - Verify the design through pilot studies and then evaluation as it goes into service

DMAIC

The term DMAIC stands for the five main steps in the Six Sigma process; Define, Measure, Analyze, Improve
and Control.

Define

• Define the customer and their 'Critical to Quality' issues and expectations
• Define the business processes that are involved
• Define the boundaries of the project
• Create a process map
• Decide on the metrics including Big Y and little y's
• Form a project team
• Develop a project charter

Measure

• Measure the existing processes by gathering data

Analyze

• Analyze the data that has been gathered

• Identify the gaps between existing and desired performance
• Identify sources of variation
• Decide on the processes that will be improved

Improve

• Propose solutions
• Carry out pilot studies, test and evaluate the proposed solutions
• Develop an implementation plan

Control
 • Implement systems and procedures to ensure the improvements are sustained
• Develop procedures, control plans and train staff

4. Operational Supply Chain Management

Introduction

Operational supply chain decisions are made hundreds of times each day in a company. These are the decisions
that are made at business locations that affect how products are developed, sold, moved and manufactured.

Operational decisions are made with awareness of the strategic and tactical decisions that have been adopted
within a company. These higher level decisions are made to create a framework within the company’s supply
chain operate and to the best competitive advantage. The day to day operational supply chain decisions ensure
that the products efficiently move along the supply chain achieving the maximum cost benefit. A number of
examples of operational decisions can be identified in manufacturing, supplier relationships and logistics.

Manufacturing

Companies make tactical decisions with regards to manufacturing, such as the adoption of kanban and just-in-
time. However, if the local manufacturing site is unable to rely on certain supplier’s delivery times, the just-in-
time method may not be suitable for some product lines. The local plant management may make an operational
decision to keep certain items in stock to ensure that production is not halted. This inventory will increase
costs, but a greater cost would be incurred if the production line was brought to a standstill due to a lack of
items from a supplier.

Suppliers

Global suppliers and negotiated contracts are decisions made at a company level to take advantage of the
company’s global buying power. This offers considerable cost savings, but local sites may have to make
operational decisions with suppliers to ensure an efficient supply chain. In some instances local negotiations
with global suppliers are required to ensure quality of the product. For example, in some countries the quality
of the product produced by a supplier is not at the same level as other countries. The local management would
have to make an operational decision to negotiate with the supplier for them to create a product with a higher
quality to ensure the quality of the finished product.

Logistics

Strategic and tactical supply chain decisions in the logistics process often focus on the use of third party
logistics companies (3PL). Many companies have identified the cost benefits of these 3PL companies and have
integrated them into their supply chain. However, in some instances these 3PL companies may not operate in
all regions where the company requires logistics. In those cases the local management has to make operational
decisions on leasing local warehousing and negotiating with regional logistics companies.

Although strategic and tactical supply chain decisions are made to bring the greatest efficiencies at the lowest
cost, the daily operations of the supply chain require that local management make hundreds of operational
decisions. These operational decisions are made within the framework created by the strategic and tactical
processes and not made in isolation.

Quality in the Supply Chain

To help improve customer satisfaction, greater emphasis is given to the aspect of quality in the supply chain.
The articles on this page will help you understand some of the quality issues and methodologies that are
relevant in current supply chain management.

1.Benchmarking In The Supply Chain

Benchmarking Overview

Supply chain operations within an organization should be constantly reviewed to identify where improvements
can be made or deficiencies eliminated. One method to help do this is to perform a series of benchmarking
tests on their supply chain processes. Benchmarking or goal setting allows a company to assess the
opportunities they may have for improving a number of areas in their supply chain including productivity,
inventory accuracy, shipping accuracy, storage density and bin-to-bin time. The benchmarking process can
provide a company some estimate of the benefits achieved by the implementation of any improvements.

History of Benchmarking

Benchmarking is the process whereby an assessment of an act or performance is measured by some means,
whether this is by a measurement of time, value or quantity. For example, an assessment of moving items from
one storage location to another can be measured by time for a single movement or by quantity if the
performance is over a set period. A benchmarking project will gather the assessments and develop a plan of
action to improve the process that was assessed. The popularity of benchmarking was spearheaded by the
Xerox corporation in the 1980’s and is now used in corporations throughout the world.

Types of Benchmarking

Three types of benchmarking can be identified; internal which is focused on the processes of a single
company, external which examines processes outside of a company’s direct industry and competitive, which
examines processes at firms within the same industry.

Internal Benchmarking

The internal benchmarking process allows a company with a number of facilities that operate the same supply
chain processes to compare and contrast the ways in which the process is performed in those facilities. For
example if a company operates five distribution centers in the US and Canada, the benchmarking process can
examine a number of operations that take place at each of the distribution centers and compare how they are
performed and what improvements can be made by comparing the results of the benchmarking. If a company
benchmarks the processes around inventory accuracy, shipping accuracy and storage density, the results of the
assessments of the facilities can help a company to improve on those processes at all of the facilities.

External Benchmarking

For companies that have performed internal benchmarking and want to investigate new ways in which to
improve performance of their internal processes, external benchmarking can produce significant
improvements. Many companies believe that their processes are as efficient as possible, but quite often, the
efficiencies are limited by the knowledge within the company. The external benchmarking process takes a
company outside of its own industry and exposes them to different methods and procedures. For example, a
manufacturer and distributor of electrical components have internally benchmarked their warehouses for a
number of years and have exhausted ideas on improving efficiencies. They approached a very successful retail
company to visit their central warehouse and benchmark the processes that occur there to compare to their own
warehouse processes. The external benchmarking allowed the manufacturer of the electrical components to
assess the processes seen in the retailer’s warehouse and develop an improvement plan for their own facilities
based on the results.

Competitive Benchmarking

For companies that are not performing as well as their competitors they may want to identify the reasons why
their processes are not as efficient. Consulting and research firms can perform competitive benchmarking
studies for companies that will identify the strengths and weaknesses of their processes based on those of their
competitors. The company can then produce improvement plans based on the results of the competitive
benchmarking.

Components of Benchmarking

There are a number of components to a benchmarking study. Not every benchmarking project will incorporate
these components, but a combination of these can be used.

• Financial benchmarking – This involves a financial analysis of the operations that are assessed. For
example, a company can compare the cost of storing a component in each of its warehouses.
• Performance benchmarking – This can compare the efficiency of performing a task in one company
location to another, or to a competitor’s.
• Product benchmarking – This method compares the product of one company against another, or
comparing between facilities in the same company.
• Strategic benchmarking – This method observes how other companies compete. This can be within the
same industry or outside of the companies industry.
• Functional benchmarking – This is considered to be traditional benchmarking where a company will
benchmark a single process at a location or a number of locations to identify where efficiencies can be
made

2.Total Quality Management (TQM)

Total Quality Management (TQM) is an approach that seeks to improve quality and performance which will
meet or exceed customer expectations. This can be achieved by integrating all quality-related functions and
processes throughout the company. TQM looks at the overall quality measures used by a company including
managing quality design and development, quality control and maintenance, quality improvement, and quality
assurance. TQM takes into account all quality measures taken at all levels and involving all company
employees.

Origins Of TQM

Total quality management has evolved from the quality assurance methods that were first developed around
the time of the First World War. The war effort led to large scale manufacturing efforts that often produced
poor quality. To help correct this, quality inspectors were introduced on the production line to ensure that the
level of failures due to quality was minimized.
After the First World War, quality inspection became more commonplace in manufacturing environments and
this led to the introduction of Statistical Quality Control (SQC), a theory developed by Dr. W. Edwards
Deming. This quality method provided a statistical method of quality based on sampling. Where it was not
possible to inspect every item, a sample was tested for quality. The theory of SQC was based on the notion that
a variation in the production process leads to variation in the end product. If the variation in the process could
be removed this would lead to a higher level of quality in the end product.
After World War Two, the industrial manufacturers in Japan produced poor quality items. In a response to this,
the Japanese Union of Scientists and Engineers invited Dr. Deming to train engineers in quality processes. By
the 1950’s quality control was an integral part of Japanese manufacturing and was adopted by all levels of
workers within an organization.
By the 1970’s the notion of total quality was being discussed. This was seen as company-wide quality control
that involves all employees from top management to the workers, in quality control. In the next decade more
non-Japanese companies were introducing quality management procedures that based on the results seen in
Japan. The new wave of quality control became known as Total Quality Management, which was used to
describe the many quality-focused strategies and techniques that became the center of focus for the quality
movement.

Principles of TQM

TQM can be defined as the management of initiatives and procedures that are aimed at achieving the delivery
of quality products and services. A number of key principles can be identified in defining TQM, including:

• Executive Management – Top management should act as the main driver for TQM and create an
environment that ensures its success.
• Training – Employees should receive regular training on the methods and concepts of quality.
• Customer Focus – Improvements in quality should improve customer satisfaction.
• Decision Making – Quality decisions should be made based on measurements.
• Methodology and Tools – Use of appropriate methodology and tools ensures that non-conformances
are identified, measured and responded to consistently.
• Continuous Improvement – Companies should continuously work towards improving manufacturing
and quality procedures.
• Company Culture – The culture of the company should aim at developing employees ability to work
together to improve quality.
• Employee Involvement – Employees should be encouraged to be pro-active in identifying and
addressing quality related problems.

The Cost Of TQM

Many companies believe that the costs of the introduction of TQM are far greater than the benefits it will
produce. However research across a number of industries has costs involved in doing nothing, i.e. the direct
and indirect costs of quality problems, are far greater than the costs of implementing TQM.
The American quality expert, Phil Crosby, wrote that many companies chose to pay for the poor quality in
what he referred to as the “Price of Nonconformance”. The costs are identified in the Prevention, Appraisal,
Failure (PAF) Model.
Prevention costs are associated with the design, implementation and maintenance of the TQM system. They
are planned and incurred before actual operation, and can include:

• Product Requirements – The setting specifications for incoming materials, processes, finished
products/services.
• Quality Planning – Creation of plans for quality, reliability, operational, production and inspections.
• Quality Assurance – The creation and maintenance of the quality system.
• Training – The development, preparation and maintenance of processes.

Appraisal costs are associated with the vendors and customers evaluation of purchased materials and services
to ensure they are within specification. They can include:

• Verification – Inspection of incoming material against agreed upon specifications.

• Quality Audits – Check that the quality system is functioning correctly.
 • Vendor Evaluation – Assessment and approval of vendors.

Failure costs can be split into those resulting from internal and external failure. Internal failure costs occur
when results fail to reach quality standards and are detected before they are shipped to the customer. These can
include:

• Waste – Unnecessary work or holding stocks as a result of errors, poor organization or communication.
• Scrap – Defective product or material that cannot be repaired, used or sold.
• Rework – Correction of defective material or errors.
• Failure Analysis – This is required to establish the causes of internal product failure.

External failure costs occur when the products or services fail to reach quality standards, but are not detected
until after the customer receives the item. These can include:

• Repairs – Servicing of returned products or at the customer site.

• Warranty Claims – Items are replaced or services re-performed under warranty.
• Complaints – All work and costs associated with dealing with customer’s complaints.
• Returns – Transportation, investigation and handling of returned items.

3.Warehouse Safety

About OSHA

Safety in American warehouses is regulated by a series of standards from the Occupational Safety and Health
Administration, commonly known as OHSA. The US Congress created OSHA under the Occupational Safety
and Health Act, which was signed into law by President Nixon on December 29, 1970. The main focus of
OSHA is to prevent work-related injuries, illnesses, and deaths. Since the administration began, occupational
deaths have been cut by 62% and injuries have declined by 42%. However, the fatal injury rate for the
warehousing industry is higher than the national average for all industries.
At a federal level OHSA inspects about 40,000 facilities per year, while the 26 state operated OHSA
organizations inspect another 60,000. OHSA can issue citations which result in financial penalties up to $7,000
for non-serious violations, but can rise to $70,000 for repeat offenders.

OSHA’s Top 10 Warehouse Citations

OSHA issues many publications on safety issues in a warehouse and the solutions that can be adopted by
businesses to reduce accidents and minimize injury. The list below is their top 10 areas for which they issue
citations.

1. Forklifts
2. Hazard communication
3. Electrical, wiring methods
4. Electrical, system design
5. Guarding floor & wall openings and holes
6. Exits
7. Mechanical power transmission
8. Respiratory protection
9. Lockout/tagout
10. Portable fire extinguishers

Forklifts
Forklifts can be dangerous, OSHA records about 100 warehouse employees are killed and 95,000 injured
every year in forklift accidents while operating forklifts. The majority of fatalities are caused by forklift
turnovers. Being crushed between a forklift and another surface is the second highest percentage, followed by
getting struck a forklift and then getting hit by falling material from a dropped load.
OHSA issue guidelines on forklift operation including the following:

• Train, evaluate and certify all operators to ensure that they can operate forklifts safely, follow safe
procedures for picking up, putting down and stacking loads
• Drive safely and never exceeding 5 mph and slow down in congested areas,
• Maintain sufficiently safe clearances for aisles and at loading docks or passages where forklifts are
used
• Train employees on the hazards associated with the combustion byproducts of forklift operation, such
as carbon monoxide.

Hazard Communication

Hazard communication refers to the information about chemical hazards and the associated protective
measures that is communicated to employees and employers. Chemicals pose a wide range of health hazards,
such as irritation, and physical hazards, such as flammability and corrosion. Chemical manufacturers and
importers to evaluate the hazards of the chemicals they produce or import; and providing information about
them through labels on shipped containers and more detailed information sheets called material data safety
sheets (MSDS).
OSHA recommend a number of measure with regards to Hazard communication:{

• Employees should be trained on the risks of each chemical being stored.

• Provide spill cleanup kits in any area where chemicals are stored.
• Have a written spill control plan.
• Train employees to clean up spills, protect themselves and properly dispose of used materials.
• Provide proper personal protective equipment and enforce its use.
• Store all chemicals safely and securely.

Electrical Safety

Many times electrical hazards are the cause of injuries and fatalities in the workplace. As well as being
dangerous in a warehouse it is one of the leading causes of accidents in construction sites. The first step
towards electrical safety is controlling or eliminating factors in your warehouse that pose electrical hazards.
Ground fault electrical shock is a common electrical hazard. OSHA requires that employers provide ground
fault circuit interrupters (GFCIs) for receptacle outlets. Warehouses should provide assured equipment
grounding conductor program. Either of these methods can eliminate hazards in ground fault electric shock.

Guarding Floor And Wall Openings and Holes

The easiest way to avoid falls in the warehouse is by eliminating and controlling fall hazards. This can be
achieved by the use of fall protection equipment or devices. There are basically two types of fall protection.
With a combination of both, you can ensure a safer environment for employees who are exposed to fall
hazards.
One type of fall protection is the fall restraint; these systems consist of equipment that prevent a free fall, for
example guardrails/standard railings, full body harness, and warning lines. The other type is the fall arrest,
these systems help by stopping a fall in progress or saving an employee in the middle of a fall, for example the
use of safety nets.

Respiratory Protection
Many accidents occur each year and most of the time it’s because of the absence or lack of personal protective
equipment (PPE). OSHA strictly regulates employers to provide their employees with proper PPE. Many
accidents occur not because of absence or lack of PPE but because employees do not to wear it. This is
particularly true of respiratory protection. In some warehouses there is the presence of toxic airborne
substances. This is where respirators should be used by employees.
Respiratory protection is designed to protect the wearer from dust, fumes, paint spray, pesticides and other
substances that could bring about long-term or permanent impairment or even death. As with other types of
PPE, safety programs provided to warehouse employees must specify the proper ways to clean, maintain and
repair respirators.

Lockout/Tagout

In the warehouse there is often defective or damaged equipment. It is important that these items are tagged
with an “Out of Service” until it gets replaced or repaired. This will keep employees away from items that may
cause serious injury or illness. According to OSHA, tag is “a device usually made of card, pasteboard, plastic
or other material used to identify a hazardous condition”. Many companies are cited by OSHA because tags
are not used in the correct way.